The Definitive Guide to Fracking

The $6 trillion global energy industry has undergone a lot of changes over its long history, from the first successful oil tanker developed by Sweden in 1878 to the first mobile steel barges for offshore drilling developed by the Texas Company in the early 1930s. But, in the modern era, hydraulic fracturing (“fracking”) stands out as the single most important innovation [for more fracking news and analysis subscribe to our free newsletter].

Fracking: A Brief History

Hydraulic fracturing involves propagating the fractures in a rock layer using pressurized fluids in order to release oil and gas that isn’t economically viable to extract using traditional drilling techniques. While fracking was technically first used in 1947, modern fracking techniques like horizontal slickwater fracking weren’t commercially used until 1998 in the Barnett Shale.

The process works by pumping fracturing fluids – like slickwater, gel or foam – into a wellbore at a sufficient enough rate to fracture the rocks below. When these fractures occur, the operator injects proppants into the well to prevent the fractures from closing when the fluid pressure is reduced. And finally, oil and gas leaks from the fractures into the well for extraction [see also Four Little Known Factors Driving the Price of Crude Oil].

Fracking has made it possible to reach significant oil and gas resources that had previously demonstrated a poor flow rate and weren’t economically accessible. In particular, the technique has become very popular for extracting oil and gas from tight sands, shale and coalbed methane formations where older oil wells were no longer effective.

Fracking Today

The International Energy Agency estimates technically recoverable shale gas resources of about 208 trillion cubic meters, or 7.3 quadrillion cubic feet. Meanwhile, the same agency estimates the natural gas production will increase from 3,276 billion cubic meters to some 5,112 billion cubic meters by 2035, as techniques like fracking become more common.

This enormous potential is just beginning to hit the market as fracking grows in popularity in the U.S. and, to a slower extent, abroad. The U.S. Energy Information Administration predicts that some 7.6 trillion cubic feet of shale gas will be produced in the U.S. in 2012, up 11.6% from 2011, with overall U.S. natural gas production expected to rise 4% to 5% per year [see also A Deeper Look At America's Commodity Industry].

The largest fracking opportunities in the U.S. lie in shale plays, including:

Barnett Shale, Texas

Bakken Shale, North Dakota

Haynesville Shale, Louisiana

Marcellus Shale, Appalachian Basin

Raton Basin, Colorado

Despite the success in the U.S., fracking has been slow to spread to other countries around the world. Many governments, like those in Europe, Asia, Africa and South America, own mineral rights that create little incentive for private parties. The practice was also temporarily suspended in Britain after a series of small earthquakes led to some concerns.

Environmental Woes

Fracking can impact the environment in a number of different ways, ranging from water contamination to increased seismic activity. These concerns have led to significant opposition to fracking in many areas, both inside the U.S. and in other countries around the world. Many of these studies are also ongoing, including a major environmental impact study in the U.S.

Water contamination is a principal concern and can easily occur during the fracking process. Accidental spills at the surface, leakage into a shallow aquifer through imperfect sealing, leakage to shallow aquifers through the rocket, and discharge of insufficiently treated waste water into groundwater or even deep underground are all common causes of concern [see also Why Alternative Energy Will Never Become Widespread (In Our Lifetime)].

The U.S. Environmental Protection Agency (EPA) estimates that 70 to 140 billion gallons of water are used to fracture 35,000 wells in the U.S. each year, while shale gas wells can use more than 4 million pounds of proppant per well. Disturbingly, some studies have shown that between 20% and 85% of fracking fluids may remain underground and contaminate groundwater.

Another major environmental concern has been increased microseismic events. The U.S. Geological Survey documented several cases of man-made earthquakes caused by hydraulic fracturing and waste disposal wells. While these have so far been small earthquakes, they may be powerful enough to disrupt underground wells and cause soil contamination.

Investing in Fracking

There are many different ways for investors to capitalize on the boom in fracking. The easiest way is to simply purchase stock in companies that hold stakes in major U.S. shale plays, including companies like Continental Resources (CLR), Rosetta Resources (ROSE) and Encana (ECA), which all have stakes in major fracking areas [see also Top 5 Global Oil Stocks By Market Cap].

Investors looking for easy diversification can also consider the Market Vectors Unconventional Oil and Gas ETF (FRAK), which contains more than 40 different stocks from the United States, Canada and Australia. These companies receive at least half of their revenue from unconventional energy or hold a stake in properties that offer the same potential.

Of course, investing in fracking is a double-edged sword. Higher production levels may produce more revenues, but they could also put downward pressure on natural gas prices as supply increases. However, the industry hopes to make up for some of this excess demand by exporting natural gas, which could result in renewed demand from overseas buyers.

Finally, some investors may also want to consider investing in auxiliary industries that supply the fracking industry. For example, companies like Heckmann Corporation (HEK) provide water services to some of the country’s most prolific shale plays, while Canada’s Poseidon Concepts (POOSF) leases modular tank systems to the oil and gas industry.

The Bottom Line

Fracking has given the U.S. an enormous potential source of domestic energy, but that cheap energy comes with environmental and health costs. While fracking hasn’t become as popular abroad, the technology appears to be on the rise in many countries, even despite the previously mentioned temporary ban in Britain.

Investors looking to capitalize on the growing industry have many different options, ranging from an industry ETF to auxiliary industry suppliers. Investors should keep in mind that greater natural gas supplies could reduce the market price and potentially hurt companies operating in the space, while there’s also ongoing regulatory risk [see also 25 Ways To Invest In Natural Gas].

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